Narendra Modi sarkar has not done enough for power sector, so what are the stocks celebrating for?

A lot has been expected of the new Narendra Modi government in terms of delivery. This is especially true in the power sector. Policy paralysis by the UPA II government hurt the power sector the most. Erected and ready-to-commission power plants had to be mothballed due to lack of fuel. Banks entered into agreements with companies and disbursed part of the loan, only to find that projects were delayed due to non-clearance from various agencies.

Expectation has been high from the new government which came to power on the development plank. However, nothing worthwhile seems to be happening on the surface. The sector continues to be plagued with the same old issues. Recent reports said 25% of power plants were running with just four days of coal supply.

Thermal power plants: both demand and supply affected
Latest data shows that plant load factor at thermal plants continue to be below the threshold limit of 65%. Lack of fuel is only one side of the problem; the other is lack of customers.

Even though the stock market has shot up and power sector companies are near their all-time highs, the ground reality remains unchanged. Industrial demand for power has not picked up. Distribution companies are not willing to buy costly power in cases where there is a fuel escalation clause as demand falls sharply with rise in cost.

Peril of not raising prices: Distribution companies
On the demand side it is the distribution companies (discoms) that need to shore up their resources. However, the old problem of shying away from increasing tariff is preventing improvement of financial health of these discoms. A recent ICRA report says that only half of the State Electricity Regulatory Commissions (SERCs) out of the 16 states that have issued orders to increase tariff hikes have actually done so, that too only by 5-10%. Some of the most chronic states like Tamil Nadu, Rajasthan and Uttar Pradesh, despite signing an undertaking to tackle discoms debt have not yet issued tariff hike order.

What is alarming is that government subsidy for state utilities is likely to increase by 17% to Rs 72,000 crore on account of upward pressure on cost of power supply and continued subsidised nature of tariffs for agriculture consumers.

Will the Modi Sarkar bite the bullet?
Unfortunately, the way the present government reacted to the tariff hike proposed by the Delhi Regulator raises question on their developmental credentials. Can this government take harsh measures which are extremely necessary for the health of the sector?

Power Minister Piyush Goyal on assuming office went to Gujarat to understand the power model adopted by the state. He has been open about the fact that Gujarat’s model will be adopted wherever possible. Towards this direction the ministry has already sought information from states pertaining to steps launched for segregation of feeders for rural and urban services. The idea is to bring down theft and separate the low cost users from the high cost ones.

Even if the country saves power theft and wastages (estimates vary from 20% to 40% of the power generated), there will be a marked improvement in the sector, which can also bring down the cost of power.

No short cut solution will save the sector
Though the steps are in the right direction, the benefits of these measures will take a few years, that too assuming that implementation is as good as it is being talked about. The first sign of movement in the power sector will be felt in the distribution area as the government will be setting up separate feeder lines. A close tab of order flow to the power distribution companies will give the first hint of reforms picking up.

As for the supply side, especially coal, Goyal has taken the stopgap measure by allowing higher imports in order to make the fuel available to all coal based power plants which will be commissioned by March 2015. Higher supply from Coal India cannot be expected for a couple of years as the railway tracks are yet to be laid.

Share prices of power sector stocks clearly show that market has priced in a lot of hope. Actual benefits are still a few quarters away. Till then it will be a test of patience for the investors.